Suntec REIT - CGS-CIMB Research 2021-07-22: Improved Underlying Performance

SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Suntec REIT - Improved Underlying Performance

Suntec REIT's 1H21 DPU of S$0.04154 within expectations at 49.6% of our FY21F forecast.
Office segment continues to outperform, from organic and inorganic drivers.
Reiterate ADD rating on Suntec REIT with an unchanged DDM-based target price of S$1.79.

Suntec REIT (SGX:T82U) reported 1H21 gross revenue of S$166.8m (+11.6% y-o-y) while distribution income from operations rose 14.6% y-o-y to S$118.2m. 1H21 DPU rose a higher 26.1% y-o-y to S$0.04154, of which S$0.02054 cents was paid in 1Q21.
The better operating performance was due to higher office and retail income and a stronger A$.
Suntec REIT’s gearing improved to 43.1% with all-in interest cost slipping to 2.41% at end-1H21. Management aims to further strengthen balance sheet through active asset and capital management.

Suntec REIT's 1H21 office NPI, including JV income, rose 28.8% y-o-y to S$145.2m, with higher performance across all properties, contributions from Nova Properties in the UK and one-off compensation from ORQ and MBFC, partly offset by performance fees paid for 9 Penang Road on completion of its sale in 2Q. Singapore office portfolio is 95% occupied.
Suntec REIT leased 405.4k sqft of space in 1H21 (144.4k sqft in 2Q), mainly from renewal activities. New leases made up about one-third of leasing contracts, mainly from Suntec Office, with demand from TMT, financial services and manufacturing & distribution sectors. The property delivered a rental reversion of +1% in 1H (+2.1% in 2Q) and management expects to maintain positive reversions for FY21F.
Suntec REIT has 7.8% and 19.4% of Singapore office leases expiring in 2H21F and FY22F, respectively.
Occupancy for Australia offices and Nova Properties in UK is unchanged q-o-q at 93.9%/100% at end-1H, with minimal expiries of 1.3% and 2.3% of non-Singapore office portfolio NLA to be re-contracted in 2H21/FY22F. With ~80% of Suntec REIT's A$ income hedged as at 1H21 and contributions from the newly-acquired The Minster Building to be felt from 2H21F, we anticipate Suntec REIT’s office contributions to improve going forward.

Suntec REIT's 1H21 retail NPI rose 18.1% y-o-y to S$33.2m, due mainly to higher revenue on lower rental assistance granted to tenants and higher gross turnover rent (GTO). There was also land tax relief from the government for the Southgate Complex in Australia and S$2.5m loss from Suntec Convention. Committed occupancy at Suntec Mall improved to 93.9% at end-1H and management maintains its target of 95% occupancy by end-FY21F.
In 2Q21, tenant sales at Suntec Mall were 31% lower vs 2019 level (-34% on a same-store basis), impacted by dining restrictions during the Phase 2 and Phase 3 Heightened Alert in Singapore, and partly mitigated by introduction of new brands/concepts. Meanwhile, shopper traffic was 42% lower vs 2019 in 2Q.
Rental reversion averaged -15.3% in 1H (- 7.2% in 2Q). Suntec Mall has a remaining 7.6% and 21.5% of leases expiring in 2H21F and FY22F. Management guided that Suntec REIT’s short-term rent restructuring strategy is likely to continue into 3Q21 for some tenants and rent reversion is likely to remain weak.

We leave our FY21-23F DPU estimates for Suntec REIT unchanged and retain our DDM-based target price of S$1.79 for Suntec REIT. At 5.7% FY21F dividend yield, we think the current Suntec REIT's share price has factored in much of the near-term earnings drag and we maintain our ADD call.
See
Re-rating catalyst: faster-than-expected recovery of its retail and convention business from COVID-19 disruption.
Downside risk: higher-than-estimated rental waivers to tenants.
See Suntec REIT ESG metrics in report attached below.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-07-22

SGX Stock Analyst Report ADD MAINTAIN ADD 1.790 SAME 1.790